• 1Q20 PATMI jumped almost 3x YoY to S$7.6mn. It beat our expectations. The growth came from three-fold spike in project marketing (i.e. new launches) revenue.
• The outlook will be weak for this year. The circuit breaker, weaker economic conditions and higher priced projects will lead to a contraction in the number of transactions. We cut our FY20e earnings by 19%. Earnings impact will only be registered in 2H20e.
• Net cash continues to pile up to S$89.8mn (+S$10mn YoY) in 1Q20 and almost 50% of the market capitalisation.
• We maintain our BUY recommendation. Our target price is lowered to S$0.60 (previously S$0.70). The outbreak has tempered any growth expectations we had for the company. PropNex retains a healthy market share of around 50% and we expect dividends (S$13mn p.a.) can be maintained with the large cash hoard of S$89.8mn.

The Positives

+ 3x jump in project marketing. As it takes 8 to 12 weeks for revenue from the booking of a new project, the growth this quarter comes from the health project sales in 4Q19. Project marketing accounts for 45% of revenue in 1Q20 (1Q19: 20%). For the Top 3 selling projects in 1Q20 (The M, Treasures at Tampines, Jadescape), PropNex market share ranged from 46% to 60%.

+ Cash keeps piling up. Together with the rise in earnings, cash from operations increased S$8.7mn in 1Q20. Capital expenditure was less than S$100k in 1Q20. Net cash on the balance sheet rose to a record S$89.8mn.

+ Huge operating leverage. The operating leverage of the business was visible this quarter. Gross profits doubled YoY to S$15mn whilst staff cost only increased S$560k (or +17.8% YoY). The rise was due to salary increment and additional 1 headcount to 175.

The Negative

– Nil  

Outlook

Management shared their outlook of transactions for FY20e. In a nutshell, the estimates are dire:

a. New launches: 1Q20 industry volumes rose 17% YoY to 2149. This will be supportive of 2Q20e earnings. However, FY20e industry transaction volumes may drop by around 20% to 7900*. These are levels worst than the 12 months post July18.

b. Private resale: 1Q20 volumes jumped 12% YoY to 2080 units. The resale market will be even worst hit than new launch. Without viewing the units physically, there is a higher risk for the buyer if there are issues with the unit. Resale units are unlike new launches where developers are reputable and there is the typical 1-year defect liability for developers. Expectations are for at least a 32% decline in transactions to 6100*.

c. HDB resale: 1Q20 volumes rose 22% YoY to 5893 unit and the highest in 9 years (for a March quarter). The circuit breaker will cause some postponement of purchases in the near-term and overall transaction for FY20e could fall by 10% to 21,500 units. We expect these transactions will be need-driven property purchase.

*PropNex estimate is a decline of 27% for the combined private resale and new projects from 19,150 units in 2019 to 14,000 units in 2020.

The extent of the COVID-19 circuit breaker impact include suspension of property viewings and marketing roadshows, temporary closure of project sales galleries and delays in new launches.

Maintain BUY with a higher target price of S$0.60 (previously S$0.70)

Our target price is lowered as we cut FY20e earnings forecast by 19%. We believe the company intends to position themselves as a high yield paying stock. To maintain dividends at 3.5 cents per annum requires a payout of S$13mn. This is well supported by the cash on hand of $89mn and excludes and further cash generated by the business.